Oped»
All in the family
JUN 21 -
As it currently exists, corporate governance is conventionally applicable in the domain of public corporations, excluding family firms from the good governance debate; yet, the fact that only 15 percent of family-owned businesses survive until the third generation indicates that governance is also a crucial issue for family businesses. What causes family firms to fail the test of time?
Families are no different than any other institution, even countries. They require values, codes of justice, fair play, and support for the weaker members of the family. They require a mechanism for redressing grievances and for having open and candid discussions.
Problems Faced by Family Firms
Problems within a business family can be briefly summarised: very few families understand that their assets comprise three forms of capital—human, intellectual, and financial. Even fewer families understand that without preservation of their human and intellectual capital, they cannot preserve their financial capital; unfortunately, families often concentrate solely on financial capital. Many families fail to understand that preserving wealth is a dynamic process. Each generation of the family must maintain the wealth-generating spirit of the first, founding generation.
Families often fail to properly measure the time frame needed for successful wealth creation. Planning for the use of a family’s human and intellectual capital is too focused on the short term and on individuals rather than wealth creation mechanisms. The lifespan for a family business should instead be measured by generations, and long-term planning is essential. Families must also understand that fundamental issues of wealth preservation and good governance are qualitative, not quantitative. Most families measure success based on the size of their financial balance sheets. But without a qualitative assessment of human and intellectual capital, the family balance sheet is incomplete and ineffective in measuring whether a family is achieving its wealth preservation goals. Family wealth includes human behaviour, teamwork, and understanding.
Family-owned businesses face unique problems with continuing their operations successfully over several generations due to governance issues. While corporate governance is conventionally regarded as applicable to public corporations, family-owned companies are equally in need of sound governance mechanisms. Creating and applying a system of good governance is crucial for the preservation of not just financial wealth, but also human and intellectual capital of family firms.
There is a growing need of a reform packages in the form of fiscal, monetary and other measures to bring real sector including manufacturing, hydropower, and trading companies, into Nepal’s securities market. The real sector of the economy is paralysed while the profit of the financial sector increases day-by-day.
The real sector, representing the majority of family-owned businesses, should be provided the opportunity through tax holidays and exemptions to gain entry into the financial market. Recently the financial sectors holds about 90 percent share of the number of listed companies and the transactions held. Out of 172 listed companies with NEPSE about 150 companies constitute the financial sector. Real sector should follow in the footsteps of the financial sector, but in NEPSE it seems to being doing the opposite
A poor information system especially relating to real sector companies comprises inter-alia, low accounting standards and inadequate disclosure requirements for the real sector companies, further reducing the reliability of such companies and increasing the unavailability of some information of different companies on the stock exchange.
To lure other large companies of the real sector to list themselves in the stock exchange, tax concessions of up to two percent should be given. Similarly, a five percent tax concession for the companies listed in Group A would be suitable. Real sector companies may be promoted on the capital market by providing special facilities.
Real sector companies have a prime role for the uniform and sustainable development of a country and the capital market as well. But the Nepali capital market is hugely concentrated on banking and financial sector companies while the number of actively traded real sector companies remains very low. The operating process and decision making process of industrial and production sector companies in Nepal are still not transparent. Moreover, some large real sector companies are running as private limited.
So, to convert such companies to public limited and make them transparent, the programmes and activities should be implemented like the companies which want to convert them to public limited from private limited and list themselves at stock exchange should be provided income tax exemption up to three percent. Moreover, if they can be classified as Group “A” companies on the stock exchange then such tax exemption percent should be five percent. A provision should be made for public companies to get loans at a lower rate (at least one percent lower) than others. Public companies that implement the best standard of accounting and auditing principles should be awarded. The recent provision by the SEBON regarding the IPO requirements of 15 percent will provide some headway in this direction.
If a family is to function as a business, then it follows that a well-managed family business should have a statement of its purpose, values, and goals. The creation of such a statement is the starting point for the process of organising a family to preserve wealth through good governance.
The objective of a system of family governance must be to align the aspirations of each individual family member with the goals of the family as a whole. Enhancing synergies between individual and family objectives encourages the long-term preservation of the family’s wealth: its human, intellectual, and financial capital.
A family’s wealth consists primarily of human and intellectual capital; financial capital is secondary. Financial capital alone cannot provide long-term wealth preservation. What a family’s financial capital can provide is a means to promote the growth of its human and intellectual capital. Without intellectual capital, even with all the money in the world, under-educated family members will not make optimal decisions. Therefore, the development of human and intellectual capital contributes to the growth of financial capital.
An explicit and voluntary statement of the family’s values and goals is necessary to create a system of governance through which those family principles can be practiced. It ultimately allows for more effective wealth preservation. Each successive generation must reaffirm its commitment to this system of governance, including a process for settling family disputes and grievances. Any such governance system must recognise that family members will be willing to give up some freedom if they realise the greater benefit for doing so, and it also allows each member to play a role in the evolution of that system.
(Singh is general manager of Nepal Stock Exchange Ltd)
Shanker Man Singh
Posted on: 2010-06-22 08:51
Headlines
Advertisements
